Simposium Nasional Akuntansi 10 Makassar



Politeknik YDHI Yogyakarta


Universitas Gadjah Mada Yogyakarta


This research aims to give empirical evidence concerning earnings management in firms violating debt covenant and to test whether earnings management in those firms are larger than that in control firms. Research population is manufacturing company listed at Bursa Efek Jakarta. The sample includes 13 firms violating debt covenant and 20 firms as control firms. The sampling method is purposive sampling. Method of statistics used is t-test.

The statistic test of first hypothesis shows that mean of discretionary accruals at a year before violation is significantly larger than that at the year debt covenant violation. This result supports debt covenant hypothesis. But, mean difference at the year of violation and at a year after violation does not provide the support for the hypothesis. The statistic test of second hypothesis shows that mean of discretionary accruals of firms violating debt covenant at a year before and at the year violation of debt covenant is not significantly larger than that of control firms. Thus, we can conclude that there are other factors besides violation of debt covenant that motivate management to perform earnings management.

Keywords: Earnings Management, Debt Covenant Hypothesis, Debt Covenant Violation, Discretionary Accruals.


* This research is a principal investigator in the Masters thesis, Saint Universitas Gadjah Mada. I offer the thanks to Prof.. Dr. Baridwan Zaki, M. Sc thesis as mentors for advice, time and discussion. AKPM-02 1

I. Background

Agency theory see the company as a nexus of contracts is an organization under contract with several parties such as contracts with shareholders, suppliers, employees (including managers) and other parties involved (Scott, 2000). The Company also has contractual ties with the creditors if the company is involved as one of the debt financing. Most companies use debt as the source of funding because it can improve performance of managers due to fears of job losses and if the performance increase, shareholders are willing to pay its share price is more expensive (Jensen and Meckling 1976 in Main 2000).

Companies that have debt contracts and other contracts would wish to minimize the cost associated with contract contract-contract (contracting theory), such as negotiation kos, kos monitoring contract performance, the possibility of renegotiation, and the cost estimates if bankruptcy or other failure (Scott , 2000). Therefore, we need a tool to assess the performance of companies in an effort to protect the interests of both parties are bound by a contract (to minimize conflicts of interest). The tool of any information generated internally by the company.

*Simposium Nasional Akuntansi 10 Makassar

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